In Case You Missed It: Key Charts of the Week

By Mark Masterson on December 22, 2023

It has been said “a picture is worth a thousand words.”
 With that in mind, below below are a few of the most important or interesting charts from the past week…..

Investors fail to remember that rate cuts happen most often when there is a recession… In full swing.

See below chart showing the blue lines (recessions) and rate cuts.  It’s pretty rare to have rate cuts without a recession – but it does happen.

Daniel Lacalle 12 18 23

As Goldman Sachs points out – the economic path is the most important path from here if the Fed starts to cut rates.

As you can see, if the Fed cuts rates and the economy is healthy – the market does well historically.  (blue line)

If the Fed is cutting rates and the economy is in recession – the market suffers.

S&P 500 performance around start of rate cuts.

via Goldman

Goldman Sachs 12 18 23

The below chart shows the past few times the Fed has cut rates with the market experiencing harder times.  They often corresponded with economic slow downs and/or inflationary windows.

Elliott Wave Intl 12 18 23

Many interesting charts over the weekend…..

Lets start with the stock market……

The run higher into year end has been very strong.

The gaps remain below.   I can tell you – eventually they will fill.  That does not mean they have to fill this year, or even early next year.  Its very rare to gaps to remain open – and would be unlikely 4-5 gaps can stay open.

Look at how overbought the internals are (RSI) at the top…….

As Goldman points out – the market is quite overbought in the short term….

Nearly 47% of $SPX stocks have an RSI greater than 70, which is the highest level in 32 years according to Goldman Sachs

Another look at the bullish percentage index…..

The Bullish Percent Index (BPI), developed by Abe Cohen in the 1950s,  is a breadth indicator based on the number of stocks based on Point and  Figure Buy signals. The indicator helps you know the market’s health and when it’s overbought or oversold.

When the bullish percent index is above 70%, the market is  overbought, and when the indicator is below 30%, the market is oversold.  Like other overbought indicators, sometimes it does not get as high or  as low.

In 2022 and 2023, the indicator reached 70 (overbought) six times  (red circles). All occurrences were near market peaks (red lines).

Last week, the BPI rose, closing at 78.40 (purple circle). A reading over 70,  followed by a retracement below 70, would give a sell signal on this indicator.

Bonnie Gortler 12 18 23

This was funny from Sentiment trader….

Over the weekend, President Biden was touting the stock market.

Trump did the same at times.

Unfortunately, they both tend to talk about the market at the wrong times……..

As Jason points out….”Might be time for the new version. Biden has about as good a track record as the previous occupant.”

Jason Geopfert 12 17 23

A look around other assets…..

Gold continues to tap on that topside breakout.

Its pretty rate to see any asset push on the upside 4 different times without an eventual breakout.  I’d expect that in 2024.

This is one massive base for gold and suggests a sizeable rally once it gets some momentum.

The dollar has broken lower as the Fed made a dovish pivot.

I would expect the dollar (over time) to move towards the lower end of this long range as indicated by the arrow.

Oil may have completed its correction with the lower dollar move as well.

The big rounded base may still be in play as oil prices rise.

Watch this as it may indicate inflation is moving higher as well.

If oil moves higher, commodities will also complete their large basing pattern and start a move higher…

Thought this was interesting on Berkshire Hathaway….

Look at how large the drawdowns are for Berkshire over the years……..

“If you are not willing to react with equanimity to a market price decline of 50% 2-3 times a century, you are not fit to be a common shareholder and you deserve the mediocre result that you are going to get.” – Charlie Munger

Charlie Bilello 12 12 23

Just one chart that caught my eye this morning – take a look at the weekly corporate buybacks….

Largest week of corporate buybacks in history according to Bank of America.

Bank of America 12 20 23

Sentiment follows price….

Looks like everyone wants into the S&P 500 here at year end.  In just 5 days, $SPY has taken in $50B+, more than any other ETF year to date.  This is the biggest 5-day take for $SPY since January 2018. 

FYI – the following week Jan 30, 2018, was vol-maggeon, (the $VIX went from 12 to 50 in 3 days and the $SPX plunged 10+% in 9  days)

Bianco Research 12/20/23

You can see what has happened to sentiment….

The red line (dumb money indicator) is pinned at extreme optimism.

Since the top in early 2022, each time the dumb money sentiment reached an extreme – it was near at least a pull-back in the market. (black line at the top is the S&P 500)

Sentimenttrader.com 12 20 23

Lower dollar and lower yields have been the driver for this year end melt-up in equity markets.

While the Fed’s pivot may signal yields are heading lower in 2024 – take note that the current decline is mature and now quite oversold. 

Like all markets – assets will move from overbought to oversold and back again to overbought…..even in a downtrend, bounces happen.

Expect a bounce in yields at some point to reset this – before likely moving lower again post bounce. 

• Elsewhere, Final Q3 GDP came in at 4.9% annualized pace q/q, down from prior 5.2%.

Taking a look at the markets drop yesterday…..What was that?

The late day selloff yesterday caught many off guard.  Yes – futures are in rally mode again today.  Yet, this market is quite overbought in the short term, with sentiment pressing near highs. 

I’ve shown the below chart many times. Gaps get filled – almost all the time.

I believe each and every one of those gaps will fill – eventually.

No – the lower ones will not fill until next year – but – it would not shock me to see the final gap, right over the blue downtrend line – get filled in the near term.

The break above that blue line could prove to be a false breakout in the short term.

They do happen when the buying gets exhausted and the final full piles into a trade. 

Once it reverses lower and breaks back below that blue line (which has not happened yet, by the way) then stop orders get triggered and the selling intensifies as the correction unfolds.

It appears commodities are very unloved compared to bonds today…..

Similar to the 2008 period….

Bank of America 12 21 23

Interesting chart from RBA advisors showing the impact of such a large tech concentration on performance of the index…..

RBA compares this period to the end of the tech bubble – and sees many opportunities (away from tech) in 2024.

“Despite the economy’s unexpected health, Chart 4 shows the proportion of stocks within the S&P 500® that outperformed the index is the lowest since the Technology Bubble. A healthier-than-expected economy normally argues for broader market leadership, so the Magnificent 7’s extreme outperformance suggests their rally has been fueled more by speculation than by fundamentals.

The market has broadened over the past several months, but the year-to-date data still show an extremely narrow market despite that broadening.

RBA advisors 12 20 23

You can see the November decline in Leading Economic Index from @Conferenceboard  was 20th consecutive drop … now closing in on streak seen in 1970s.

Schwab 12 22 23

It’s not from lack of trying by our government.

In fact, Government spending is now 38% of GDP.  This is the highest level seen since 1964, and back at levels we saw during the Global Financial Crisis.

The major (obvious) difference is – we are not in a crisis like the GFC.

(Unless you view the upcoming election as a crisis – which is why they are spending like drunken sailors)

Gameoftrades.com 12 22 23

Combine the government spending with the Fed’s recent pivot to potential rate cuts next year, and we are seeing some signs of inflation stirring again.

Recently we have seen oil prices rise, a large-scale supply disruption (red sea), a rise in Small Business Compensation Plans (which happens to lead wage inflation), an acceleration in Supercore Inflation, a Median Wage Growth print holding at 2.6X target, a step function easing in financial conditions. 

All of the above could be a hint of inflation turning higher again next year. 

Remember the 1970’s?

In the chart below, it’s clear that inflation is following the same exact path seen in the 1970s.

All while markets are now pricing-in 6 rate cuts in 2024, DOUBLE what the Fed is guiding.

The Kobeissi Letter 12 22 23

Sentiment follows price……

Active managers had less than 25% exposure to equities in late October when the S&P 500 was at 4,100.

Today their equity exposure has jumped to 97% with the S&P 500 above 4,700.

Perhaps you could say they are now “all-in”.

Interesting overlay of a few sentiment readings on the market……

S&P 500: 

• The NAAIM Exposure Index which measures the US equity exposure of active fund managers just reported the highest reading since July.
• The CNN Fear & Greed Index has been posting extreme greed throughout the week.
• The chart below of the S&P 500 marks the relative peaks sentiment and exposure.
• The combination of excessive greed and exposure have preceded all meaningful decline since the 2022 peak.

Tomthetrader.com 12 22 23